Quebec Proposals on Aggressive Tax Planning

Welcome to the inaugural Canadian and international tax podcast by PricewaterhouseCoopers Canada and its associate law firm, Wilson and Partners. We will be producing topical and timely podcasts dealing with the key taxation issues affecting businesses and individuals. Our podcasts will be available from our website pwc.com/ca/taxtracks as well as iTunes.

In this podcast, I will outline important proposals to curb what has been described as "aggressive tax planning."

These proposals were released at the end of January 2009 by the Quebec government. Similar proposals could spring up in the other provinces and territories, and, most importantly, at the federal level.

Under the Quebec proposals, Quebec taxpayers – and these could be corporations or individuals – that participate in certain transactions will be required to disclose sufficient details to permit the government to identify and analyze the tax planning strategy. If they don't, they could face stiff penalties.

The proposals also expand Quebec's general anti-avoidance rule – GAAR for short. If GAAR applies, both Quebec taxpayers and their advisers could be penalized unless required disclosures have been made in advance.

So, what are these "aggressive tax planning" transactions that Quebec taxpayers would have to disclose?

Several kinds of situations would require disclosure.

One is a transaction that provides a tax benefit regarding which the taxpayer retains the services of an advisor and under the terms of the arrangement the taxpayer agrees to maintain confidentiality.

The other situations that would require disclosure are when the advisor to the transaction is compensated on a results basis. This could involve:

a contingency fee that depends, in whole or in part, on the taxpayer obtaining the tax benefit under the transaction;

a fee that is to be refunded if the tax benefit does not materialize; or

a fee that is payable only after the reassessment period, applicable to the taxation year during which the transaction takes place, ends.

All of the situations that require disclosure involve a tax benefit, advice, confidentiality and/or fees. The nature or specific details of the transaction do not matter.

Under the proposals, taxpayers are required to disclose the details of the transactions within 30 days of when the transaction begins to be carried out – and that could be well before the transaction is complete.

Penalties for late or non disclosure are significant, starting at $10,000 and increasing $1,000 per day. The maximum is $100,000.

What about the proposals that expand the Quebec GAAR?

The current Quebec GAAR applies only to a reduction, avoidance or deferral of tax, including a refund of tax, under Quebec's Taxation Act.

The GAAR will be expanded to include transactions that result in reducing, avoiding or deferring tax of other jurisdictions (that is, tax of other provinces, federal tax and other Quebec tax) or that result in increasing the refund of tax of other jurisdictions or of other Quebec tax.

The GAAR will be expanded to include transactions that result in reducing, avoiding or deferring tax of other jurisdictions (that is, tax of other provinces, federal tax and other Quebec tax) or that result in increasing the refund of tax of other jurisdictions or of other Quebec tax.

Not only that, the period the Quebec revenue authorities would have to issue a GAAR reassessment would be increased by three years.

The current reassessment period is three years from the date of the notice of original assessment for Canadian-controlled private corporations, and four years for other corporations and for mutual fund trusts.

The proposals have a second set of penalties related to GAAR. These apply to taxpayers and to promoters if a GAAR assessment is issued.

For taxpayers, the penalty would be 25% of any additional tax that results from the application of GAAR. For promoters, it would be 12.5% of any fees received for the transaction.

However, there is an out: These additional GAAR penalties, including the extended reassessment period, won't apply if the taxpayer discloses the transaction within the 30 days or uses a preventive disclosure mechanism. That mechanism involves disclosing the transaction by the filing deadline for the tax return that includes the year in which the transaction was carried out. For a calendar year corporate taxpayer, this means that the disclosure has to be made by June 30thof the subsequent year.

To sum up:

First – Quebec taxpayers that participate in certain transactions must disclose this within 30 days the transaction begins to be carried out. Otherwise, stiff penalties may be incurred.

Second – The proposals broaden GAAR, causing more transactions to be caught.

Third – Unless appropriate disclosure is made, the GAAR reassessment period will be three years longer and new GAAR penalties will be imposed on both taxpayers and promoters.

Finally, as I mentioned, similar proposals could appear outside Quebec and at the federal level.

The government of Quebec is accepting feedback on the proposals until April 1, 2009. Given the scope of the proposed measures, it is hoped that after the consultative period, the Quebec taxation authorities will consider making substantive changes. PricewaterhouseCoopers is participating in the consultative process and will be making a submission.

For further information contact your PricewaterhouseCoopers or Wilson & Partners adviser, or Christopher Kong of PwC's Canadian National Tax Services.

You may also refer to our Tax Memo, "Quebec Proposals on Aggressive Tax Planning," under publications on our website at pwc.com/ca/tax and on Tax News Network at www.ca.taxnews.com.

The information in this podcast is provided with the understanding that the authors and publishers are not herein engaged in rendering legal, accounting, tax or other professional advice or services.

The audience should discuss with professional advisors how the information may apply to their specific situation.

Copyright 2009 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership, or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity. For full copyright details, please visit our website at pwc.com/ca.

Through interviews with prominent PwC tax subject matter professionals, Tax Tracks is an audio podcast series that is designed to bring succinct commentary on tax technical, policy and administrative issues that provides busy tax directors information they require.

Quebec Proposals on Aggressive Tax Planning

Welcome to the inaugural Canadian and international tax podcast by PricewaterhouseCoopers Canada and its associate law firm, Wilson and Partners. We will be producing topical and timely podcasts dealing with the key taxation issues affecting businesses and individuals. Our podcasts will be available from our website pwc.com/ca/taxtracks as well as iTunes.

In this podcast, I will outline important proposals to curb what has been described as "aggressive tax planning."

These proposals were released at the end of January 2009 by the Quebec government. Similar proposals could spring up in the other provinces and territories, and, most importantly, at the federal level.

Under the Quebec proposals, Quebec taxpayers – and these could be corporations or individuals – that participate in certain transactions will be required to disclose sufficient details to permit the government to identify and analyze the tax planning strategy. If they don't, they could face stiff penalties.

The proposals also expand Quebec's general anti-avoidance rule – GAAR for short. If GAAR applies, both Quebec taxpayers and their advisers could be penalized unless required disclosures have been made in advance.

So, what are these "aggressive tax planning" transactions that Quebec taxpayers would have to disclose?

Several kinds of situations would require disclosure.

One is a transaction that provides a tax benefit regarding which the taxpayer retains the services of an advisor and under the terms of the arrangement the taxpayer agrees to maintain confidentiality.

The other situations that would require disclosure are when the advisor to the transaction is compensated on a results basis. This could involve:

a contingency fee that depends, in whole or in part, on the taxpayer obtaining the tax benefit under the transaction;

a fee that is to be refunded if the tax benefit does not materialize; or

a fee that is payable only after the reassessment period, applicable to the taxation year during which the transaction takes place, ends.

All of the situations that require disclosure involve a tax benefit, advice, confidentiality and/or fees. The nature or specific details of the transaction do not matter.

Under the proposals, taxpayers are required to disclose the details of the transactions within 30 days of when the transaction begins to be carried out – and that could be well before the transaction is complete.

Penalties for late or non disclosure are significant, starting at $10,000 and increasing $1,000 per day. The maximum is $100,000.

What about the proposals that expand the Quebec GAAR?

The current Quebec GAAR applies only to a reduction, avoidance or deferral of tax, including a refund of tax, under Quebec's Taxation Act.

The GAAR will be expanded to include transactions that result in reducing, avoiding or deferring tax of other jurisdictions (that is, tax of other provinces, federal tax and other Quebec tax) or that result in increasing the refund of tax of other jurisdictions or of other Quebec tax.

The GAAR will be expanded to include transactions that result in reducing, avoiding or deferring tax of other jurisdictions (that is, tax of other provinces, federal tax and other Quebec tax) or that result in increasing the refund of tax of other jurisdictions or of other Quebec tax.

Not only that, the period the Quebec revenue authorities would have to issue a GAAR reassessment would be increased by three years.

The current reassessment period is three years from the date of the notice of original assessment for Canadian-controlled private corporations, and four years for other corporations and for mutual fund trusts.

The proposals have a second set of penalties related to GAAR. These apply to taxpayers and to promoters if a GAAR assessment is issued.

For taxpayers, the penalty would be 25% of any additional tax that results from the application of GAAR. For promoters, it would be 12.5% of any fees received for the transaction.

However, there is an out: These additional GAAR penalties, including the extended reassessment period, won't apply if the taxpayer discloses the transaction within the 30 days or uses a preventive disclosure mechanism. That mechanism involves disclosing the transaction by the filing deadline for the tax return that includes the year in which the transaction was carried out. For a calendar year corporate taxpayer, this means that the disclosure has to be made by June 30thof the subsequent year.

To sum up:

First – Quebec taxpayers that participate in certain transactions must disclose this within 30 days the transaction begins to be carried out. Otherwise, stiff penalties may be incurred.

Second – The proposals broaden GAAR, causing more transactions to be caught.

Third – Unless appropriate disclosure is made, the GAAR reassessment period will be three years longer and new GAAR penalties will be imposed on both taxpayers and promoters.

Finally, as I mentioned, similar proposals could appear outside Quebec and at the federal level.

The government of Quebec is accepting feedback on the proposals until April 1, 2009. Given the scope of the proposed measures, it is hoped that after the consultative period, the Quebec taxation authorities will consider making substantive changes. PricewaterhouseCoopers is participating in the consultative process and will be making a submission.

For further information contact your PricewaterhouseCoopers or Wilson & Partners adviser, or Christopher Kong of PwC's Canadian National Tax Services.

You may also refer to our Tax Memo, "Quebec Proposals on Aggressive Tax Planning," under publications on our website at pwc.com/ca/tax and on Tax News Network at www.ca.taxnews.com.

The information in this podcast is provided with the understanding that the authors and publishers are not herein engaged in rendering legal, accounting, tax or other professional advice or services.

The audience should discuss with professional advisors how the information may apply to their specific situation.

Copyright 2009 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership, or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity. For full copyright details, please visit our website at pwc.com/ca.